Playing too hard to get
India could learn a thing or two about retailing from the likes of Walmart and Tesco. The first rule may be that slamming the door in your customers’ face just as you open up shop is a good way to send them running to another supermarket. What seemed like a turning point last week, when the Indian government announced it would allow foreign investment in retailing, now looks to have become an embarrassing U-turn by the beleaguered government. India can’t afford to continue to tarnish its brand.
India has put a plan to open up its retail industry to foreign supermarkets on hold, a senior government source told Reuters on Dec. 4. The first major economic reform since Prime Minister Manmohan Singh’s graft-riddled term was reelected in 2009 has been met with fierce opposition from some who say it will destroy the livelihood of millions of small traders. New Delhi continues to disappoint foreign direct investors, with domestic politics seemingly relentless in its refusal to allow major economic reforms.
India’s economy runs twin fiscal and current account deficits. It needs inflows of foreign capital both to fuel economic growth and to finance shortfalls on the current account which stands at 3 percent of GDP. In 2010 India was the only BRIC country to see a decline in foreign direct investment (FDI). The combined inflows from FDI and institutional investors declined from $16 billion in the first quarter of this year to only $4 billion in the second quarter. This drop-off is putting pressure on the rupee which hit an all-time low against the U.S. dollar last month. The weakness of the rupee in turn fuels domestic inflation which is already above 10 percent.
This spiral needs to be halted. India business is intensely frustrated that at a time when the global economy is weak, the country’s home-grown troubles are creating even more problems. The opening of the retail sector looked to be a good start to turn things around. The government needs all the political skill it can muster to ensure this is genuinely only a temporary pause.